First glimpses of a new health care world

September 20, 2013, 1:44 PM UTC

FORTUNE — As health insurance is reshaped, some major corporations are switching the way they offer coverage to current employees and retirees, in a move that is likely to pave the way for major change to the American health care system.

IBM (IBM) — which has about 110,000 retirees — is planning to shift its traditional company-administered plan to private Medicare health insurance exchanges for people who are 65 and older. Retirees can use company subsidies to buy Medicare Advantage plans or other coverage to supplement the services they receive under the federal program.

On the heels of IBM’s retiree changeover, drug-store giant Walgreen Co. (WAG) announced this week that it would move its 160,000 current employees to Aon Hewitt’s Corporate Health Exchange starting next year. Two major companies, Sears Holdings Corp. (SHLD) and Darden Restaurants (DRI), have already signed their current employees with Aon Hewitt, which says that it is now providing services to some 330,000 active employees.

IBM’s move could be a win all around — savings for companies trying to keep a lid on contributions to retired employee medical costs, lowered costs because of more insurance carrier competition, and a wider range of coverage options. Or, as the health care overhaul kicks into gear, it could usher in an era of confusion as people struggle to navigate online insurance marketplaces.

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One point of confusion is the word “exchange.” A private exchange, like Extend Health, where IBM’s retired workers are being directed, or Aon Hewitt, is different from public health insurance exchanges, called for under the Affordable Care Act in every state, where government-subsidized premiums help those with lower incomes.

With private exchanges, companies pay a set amount annually to cover the company’s obligation for health care, and workers use that sum to buy coverage of their choice.

“A private exchange is a fancy word for more choice,” says Paul Fronstin, head of health research for the Employment Retirement Benefits Institute.

Although the institute conducts research independently, one of its founders was IBM, which was fairly blunt about its reasons it opted to switch how it provides health care insurance to its retirees.

The company, in a video statement, told its retirees that the cost of its current group plan is projected to triple in the next few years, affecting retiree premiums and out-of-pocket costs. IBM retirees have yet to learn how much the company will contribute to their health insurance spending accounts.

Major corporations like Time Warner (TWX), Caterpillar (CAT), CSX (CSX), and Whirlpool (WHR) have signed up their Medicare-eligible retirees to participate with Extend Health, which was acquired last year by Towers Watson.

More companies are expected to adopt the exchange model and move their retirees away from group health coverage. A Towers Watson survey, released in August, of 420 midsize and large companies found that by next year 25% of them are likely to discontinue their employer-sponsored plans for employees older than 65. That percentage will rise to 44% by 2015, according to the survey findings.

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According to Aon Hewitt’s projections, the company expects to almost double its clientele next year, providing coverage for 600,000 employees and their families.

In shifting health care, companies appear to be following the pension phase-out game plan. Many corporations have eliminated the company pension and, instead, make contributions to employee 401(k) plans. Now, with health care, they will not be burdened with open-ended medical costs.

That burden is then put on the employee or retiree, who must individually factor in the costs of chronic conditions like diabetes or blood pressure, ongoing mechanical issues like a pacemaker, as well as their financial means, location, and other considerations in selecting a plan.

For retirees, the average couple is projected to need $240,000 for medical expenses during retirement, according to Fidelity Investments’ May 2012 report, “Retiree Health Care Cost Estimate,” making health care one of the biggest expenses for elder Americans.

Bryce Williams, who founded Extend Health and is now Towers Watson’s managing director of exchange solutions, says that the company will be providing phone assistance to help retirees choose the best option among the 4,500 plan combinations offered by 90 insurance carriers.

“There will be intensive help from agents because our previous experience has found that if people just buy the least expensive plan, that does not always provide the coverage they need,” he says. Having choices, he says, creates competition that keeps costs in check.

So far, Williams says Extend Health has enrolled nearly 500,000 retirees from 300 companies in its Medicare insurance exchange, which is the country’s largest.

In April, it also started an exchange for currently employed workers to offer health care options for full- or part-time employees. And with health costs projected to rise as much as 5.2% this year, the private exchanges are hoping to attract more companies to adopt the online marketplace model.

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While most workers are unfamiliar with the idea of exchanges, one-third of companies with at least 5,000 workers that were surveyed recently by Kaiser Family Foundation said they would consider offering benefits through a private exchange in future years. Those firms employ almost 40% of covered workers, according to the 2013 Employer Health Benefits Survey of nearly 3,000 companies released in August by Kaiser.

“Their interest could portend a significant shift in the way many people get their health insurance in the future,” the report noted.

So far, no one is forecasting a wholesale abandonment of company-subsidized health care benefits, which more than 80% of companies rate as an important factor in recruiting and keeping employees, according to Towers Watson.